Bitcoin`s limitations

If you’ve worked your way through the two previous articles in this section you should have learned the following key things. 

• Cryptocurrency fulfills all the characteristics of sound money.
• Bitcoin was the first, and most influential, cryptocurrency.
• Its creator was Satoshi Nakamoto – publishing its blueprint in 2008.
• How Bitcoin works to achieve a digitally scarce form of money.

The achievements of Bitcoin’s creator will likely be considered as important as the invention of the internet or personal computer. Not simply a new form of money, but an entirely new way of thinking about money. 

As ingenious as the Bitcoin whitepaper was, it wasn’t perfect. 

This problem is known as the Bitcoin trilemma; how to achieve the three core functions of an ideal cryptocurrency:

1. Security – Can it provide a secure, trustworthy & reliable monetary system 
2. Scalability – Can it support increasing numbers of users with no compromise on speed or convenience?
3. Decentralisation – Can it continue to function without a central point of control.

Understanding this trilemma will give you a better appreciation of the problems Bitcoin solves, as well as those things it isn’t an ideal solution for. 

This can then put into context the projects and innovations that have emerged in response to the perceived shortcomings, which fall into one of three distinct groups:

• Change the rules
• Build on top
• Build an alternative/sacrifice one of the pillars

One of the most commonly discussed weaknesses, is that in order to create a new form of scarce internet money, with no controlling authority, Satoshi Nakamoto had to prioritise design features that make Bitcoin unsuitable for low value, high frequency transactions. 

The Coffee Shop Illustration

Bitcoin’s design achieves points 1 and 2 – security and decentralisation – at the expense of aspects of scalability (3) for use as a convenient medium of exchange. The most frequently used illustration of this is buying a cup of coffee. 

From our previous article we discovered how the Bitcoin network confirms new transactions. Each confirmation takes roughly 10 minutes, with six confirmations being regarded as optimal, to reduce the chances of an incorrect transaction to an infinitesimal level. 

Now it doesn’t take a computer scientist to realise that buying a cup of coffee doesn’t take 60 minutes, or even 10 minutes. On that basis, no one is going to use bitcoin where the transaction needs to be instant, especially when there are perfectly good existing services that provide that convenience at the expense of what bitcoin does well.

65,000 vs 7
The number of transactions a second the Visa network 
an support vs Bitcoin on-chain

Given its centralised design, the Visa Network can support 65,000 transaction messages a second; because of the limitations described, Bitcoin can support seven per second. It sacrifices speed for security, which is achieved through the confirmation process, fundamental to its principle of being managed by a decentralised network.

The proposed solutions to the trilemma have led to a broadening of the cryptocurrency ecosystem as well as tribalism and friction, with each group believing in the value of their approach. 

The only true judgement comes from whether people use the system or an alternative. The first real challenge to this open design came in August 2017 when an alternative Bitcoin came into existence, with slightly different rules, known as a Fork.